- European stocks opened lower as the Asian risk-off momentum carried over into European trading, but equities found their composure and recovered most of the opening losses. Oil’s multi-day rally stalled after OPEC production increased as member exempt from supply guts boosted output. There is no trading in the US today because of the 4th of July holiday.
- ECB Board member Praet sounded dovish as he said patience and persistence is needed. Patience as inflation convergence with the target needs more time to show in the data and underlying price pressures continue to be subdued. Persistence as future inflation remains contingent on the current accommodative monetary policy.
- BoE’s Ian McCafferty, who voted for a rate hike in the last policy meeting, confirmed his backing for a hike as the economy has not slowed as feared after the Brexit vote and inflation has been high.
- Sweden’s Riksbank, long noted for its extreme dovishness despite the country’s buoyant economy, has kept the benchmark interest rate on hold at -0.5%, and indicated it’s in no hurry to change course. It did however, as expected, weaken the easing bias in its statement slightly.
- The number of people registered with Spain’s unemployment offices dropped by 98.3K in June to 3.36M, the lowest number in eight years. The declines was lower than the expected 114.9K and lower than the previous decline of 111.9K.
- UK construction is still growing, but momentum appears to have slowed a little, with the latest PMI for the sector stumbling to 54.8 in June, from 56 in May, and just shy of forecasts. Survey respondents saw renewed risk aversion among clients reflecting concerns about the economic outlook and heightened political uncertainty.
- The BOE’s regulatory authority (PRA) said the resilience of consumer-credit portfolios is reducing due to the combination of growth, lower pricing, falling average risk weights in internal-ratings models and increased high risk lending. Therefore, the PRA will require all regulated firms to provide evidence that these concerns are addressed.
Rates
Dull trading in the absence of US traders
German bonds opened higher, as Asian trading turned risk-off on geopolitical tensions, but soon shifted sideways as the risk off sentiment eased in European bond and other markets. At noon, the Bund tried to rally higher but the move missed panache. By 14h, the Bund hit the opening levels again. ECB Peter Praet spoke in the afternoon, but couldn’t give bonds direction. In very low volumes (see graph), the Bund again failed to stay further away from the key support levels (see graph). At best, some bottoming out process has started. Worst case, it is only a temporary pause awaiting key US eco data later this week. Praet sounded more dovish than his boss recently, but markets have not forgotten that he asked his colleagues at the Governing Council to wait as long as possible before discussing the ECB exit policy in the media. The Austrian small auction of 1.5% 2047 bonds and the German auction of 0.5% IL 2030 Bund passed without disturbing the overall market. At the time of writing, the German yield curve steepened with yields ranging from -2 bps (2-yr) to +1.5 bp (30-yr). On intra-EMU bond markets, 10-yr yield spread narrowed again modestly for the peripherals.
ECB Praet called for persistence and patience because inflation convergence needs more time to show through convincingly in the data. He was optimistic that, when economic prospects brighten, inflation would converge to the 2% objective. He pointed to subdued core inflation and wanted to see the entire distribution of inflation expectations shift a fair distance to the right. He hailed the effectiveness of the ECB’s APP programme and said the inflation outlook is contingent on easy financial conditions.
Currencies
Dollar extends cautious rebound
In Asia, it looked like a risk-off sentiment would hamper yesterday’s USD rebound. However, European markets ignored the Asian tensions though. In a market deprived of important eco news, the dollar found its composure and continued an, albeit very gradual, rebound. EUR/USD trades in the 1.1340 area. USD/JPY is changing hands at around 113.25.
Overnight, risk sentiment deteriorated in Asia. Especially Hong Kong stocks were hit. A new North Korean missile test raised political uncertainty and spoiled investors sentiment. The yen profited slightly. USD/JPY dropped to the 113 area. EUR/USD also lost a few ticks and dropped to the mid 1.13 area. (EUR/JPY driven?).
European equities declined about 0.5% in the open. USD/JPY dropped to the 112.75 area. EUR/USD filled bids at around 1.1340. However, most of the zquity opening losses were almost immediately reversed.
European investors had no intention at all to join the Asian-inspired risk-off trade. European equities settled in a tight range close to, mostly slightly below yesterday’s closing levels. The US currency kept a positive intraday bid, to some extent continuing yesterday’s rebound. EUR/USD held a tight range in the mid 1.1350 area, close to this week’s low. USD/JPY regained the 113 barrier.
With US markets closed, there was no big impetus for USD trading from the other side of the Atlantic this afternoon. ECB’s Praet kept a soft tone. The euro lost marginal ground on his comments. US equity futures are trading with modest gains, the Nasdaq outperforming. Asian geopolitical concerns are far again, only US President Trump may still act and add fuel to the flames and put pressure on China? Whatever, the dollar remains well bid. EUR/USD trades in the 1.1340/45 area. USD/JPY is changing hands in the 113.25 area.
Sterling declines on USD softness
There was no big story to tell on GBP trading today. Cable and EUR/USD drifted south in lockstep, mirroring a cautious intraday USD rise. The UK construction PMI dropped slightly more than expected from 56.00 to 54.8, without any lasting impact on sterling trading. On the other hand, BoE’s McCafferty in an interview reiterated his view that a rate hike would be prudent. His view is no surprise as he already voted for a rate hike in June. The impact on sterling trading today was limited. Even so, the internal debate within the Bank of England continues. EUR/GBP trades in the 0.8780 area. Cable drifted to the 1.2920 area.
